Malaysian Resources Corp Bhd’s (MRCB) 9M18 result fell below market and our expectations. Net profit grew 17% yoy to RM74m in 9M18, mainly driven by a net gain of about RM52m (70% of net profit) from land sales. We cut our core EPS forecasts by 9-58% in FY18-20E to reflect lower property and construction earnings. We believe MRCB’s earnings growth prospects and financial position will improve in FY19E. Maintain BUY with a RM0.90 target price, based on 40% discount to RNAV.

Below Expectations

Core net profit of RM22m (-62% yoy) in 9M18 was only 20-21% of consensus and our full-year forecasts of RM103-109m. This was mainly due to low progress billings and high operating costs for its new property development projects such as Sentral Suites and TRIA, 9 Seputeh. There were also delays in the implementation of the LRT Line 3 (LRT3) project due to the ongoing review to reduce cost by the government.

Land Sale Gains

MRCB realised PBT of RM69m from land sales. The sale of the German Embassy land to SOCSO contributed revenue of RM323m and PBT of RM37.6m, which was recognised in 3Q18. In 2Q18, MRCB realised a RM31.3m gain from the disposal of land in Penang. However, property development earnings fell 21% yoy to RM89m due to the completion of the Easton Burwood project boosted earnings last year, while most of its new projects are still at early stages of construction.

Lower Construction Earnings

Construction earnings eased 4% yoy to RM45m in 9M18. The LRT3 project contributed RM20.7m as its share of joint venture (JV) earnings in 9M18 compared to just RM7.2m in 9M17. EBIT margin improved to 8% in 9M18 from 2.9% in 9M17. We cut our core EPS forecasts by 9-58% in FY18-20E to reflect lower construction and property development earnings due to the slow progress billings.

BUY With TP of RM0.90

We reiterate our BUY call on MRCB with TP of RM0.90, based on the same 40% discount to RNAV. The lower construction and property valuation was offset by the positive impact from rolling forward our DCF base year to FY19E. The clearing of uncertainties on the EDL and LRT3 projects will improve its financial position and sustain earnings.

EDL deal clears the air of uncertainty

MRCB has agreed to terminate its Eastern Dispersal Link Expressway (EDL) concession for a cash compensation of RM1,325.8m from the government. We view this long-awaited deal positively as it will lead to interest cost savings, a one-off gain of RM24m and reduce net gearing to 0.46x from 0.71x as at end-3Q17. Recall that the government stopped toll collection on the EDL in December 2017 and was negotiating the compensation for concession termination. But the change in government led to some uncertainties on the deal, which have since been cleared with the signing of the agreement on 12 November 2018.

LRT3 Contract Terms Revised

MRCB–George Kent Joint Venture received a Letter of Appointment from Prasarana for the LRT Line 3 (LRT3) for a fixed contract value of RM11,856m (includes contingency sum of RM400m) on 2 November 2018. The date of completion is 28 February 2024. The change in role to a turnkey contract rather than Project Delivery Partner (PDP) increases execution risk due to the fixed contract value. However, the JV could reap a higher profit margin than the fixed PDP fee at 6% of project value if there are any cost savings.

Key Risks

Key upside/downside risks are stronger/weaker property sales and higher/lower construction margins.

Source: Affin Hwang Research - 23 Nov 2018